B-F Refocuses A&P Spend Off Premise

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FILED SEPTEMBER 1, 2009

Dear Client:

Building the off-premise continues to be a big focus for Brown-Forman as consumers drink more at home. The company said today they reallocated money spent on advertising and promotion (A&P) in the first quarter ended July 31 to boost value added packs and increase their presence at retail stores, which helped underlying sales.

“The shift from media to something else isn’t necessarily lower quality. We consider if more efficient and higher quality,” said chief Paul Varga with regards to shifting money away from A&P.

Boosting ready-to-drink (RTD) brands is another big initiative for the company that goes hand in hand with the off-premise. Paul was quick to point out, though, that they’re still focused on their distilled spirits brands and not shifting focus entirely on RTDs. “This is just one example of how we’re being adaptive and thoughtful” in light of the changing economic conditions.

RTDS: GATEWAY INTO THE OFF PREMISE. In the first quarter B-F promoted its brands more actively at retail with the expansion of Southern Comfort and Jack Daniel’s RTDs. Paul noted that RTDs “play important roles on two fronts.” One, they make it more convenient for consumers to drink spirits at home, and offer an alternative to beer and wine.

Furthermore, RTDs help boost the flagship brand. “The sheer presence of branded single serve RTDs at retail, at home and importantly in hands of consumers at actual point of consumption creates a large number of incremental, highly efficient branded impressions,” said Paul in his opening comments. They “educate consumers” about new ways to consume these brands and therefore promote mixability. “In short we believe RTDs can be both volume and sales generating vehicle for our brands and efficient marketing tool for our trademarks as well.”

Jack Daniel’s family of brands had an excellent quarter with global net sales growing 8% on a constant currency basis. CFO Don Berg said in his prepared remarks that El Jimador is one of the hottest premium brands in the US market right now.

However, the summer was tough on premium spirits as a whole, said Don. The overall category experienced softness in the US and UK in the first quarter.

INVENTORY REDUCTIONS IMPROVE. Pressures from retail inventory reductions eased in the US, although B-F is still “concerned.” Some of the company’s wine and higher-margin spirit brands experienced retail inventory reductions during the quarter.

DISCOUNTS RESULT OF LAGGING ON-PREMISE. The on-premise is still experiencing declines worldwide and in the US. NABCA data in the three months to July show that on-premise trends worsened in the US, declining -6.5%, and were outpaced in the 12 months to July where volumes declined -4.6%.

Although some companies suggest they are seeing growth in premium brands, B-F said trading down to lower price points accelerated in the US in the first quarter. As a result, “competitors tried to counteract trading down by discounting,” said Don.

HEADED FOR “EXTREMELY COMPETITIVE” HOLIDAYS. In increased effort “to shift focus off premise where the consumer has moved,” B-F is continuing to look for ways to add value to its packs to keep price high and equity strong, said Don. They anticipate that some of the “deep discounts in Q1 will return or accelerate in the holiday period...we plan on being flexible in this competitive landscape.”

When asked to comment further about increased promotion during the holidays, Paul said: “As it relates to us we’re obviously going to pay attention to what all our competition is doing out there, not just the larger players but every brand....we don’t just blindly follow any single competitor on price...that doesn’t give us absolution on being competitive. We have to find ways to be competitive off premise. It’s a brand by brand exercise.”

“We’re not going to drop any of our brands prices so deep to arbitrarily build volume over market share,” said Paul.

FULL YEAR OUTLOOK. The company’s fiscal 2010 full-year earnings outlook remains unchanged at $2.60 to $3.00 per share due to the unpredictable economic environment.

“We are pleased with our good start to the year but we believe the environment will remain uncertain and challenging,” said Paul.

“We’re at least cautious about what might happen in the holiday season and Q2 through the fourth quarter,” he continued.

A RETURN TO PREMIUMIZATION. However, Paul is confident that premiumization will return because there are too many players in the industry that benefit from trading up. “I feel because of the profitability of the spirits segment and the attractiveness of the premium segment – I continue to be a believer that there’s too many constituents, distributors, retailers and other suppliers, that will promote premiumization and will benefit from the promotion.” He admitted that the consumer has to be on board as well but “I’m a believer that premiumization will continue in the right time.” He anticipates low-single digit volume growth in 2010 for the overall spirits market.

WSD BRIEFS:

IN A MEMO FROM FOSTER’S WINE ESTATES svp Michael Holden to all US Sales (obtained by WSD), the company announced that no one will receive bonuses in fiscal 2009. “Because of the Americas underperformance and our need to mitigate our financial gap in F10 we've made the decision not to pay out bonus for F09,” he said. “I understand this is a tough message to hear. I am focused on ensuring we do the right things to make this a one-time occurrence, and that we return to strong results and payment of bonuses in F10.”

AUTHORITIES ARE INVESTIGATING whether agricultural fireworks used to scare off birds at a Constellation Wines’ vineyard are responsible for the Gloria Fire near Soledad, California. The Gloria Fire broke out last Thursday at the vineyard and was eventually suppressed yesterday (September 1). A house and an outbuilding were destroyed in the fire along with 6,400 acres. According to local reports, investigators are trying to discover who’s responsible for setting off the fireworks although it’s not illegal this time of year. If discovered, they face having to pay the estimated $4 million it cost to fight the blaze.

ABSOLUT NAMES NEW VP OF MARKETING. Anna Malmhake – the current director of global marketing for The Absolut Company – has been named to succeed Matt Aeppli as vp of global marketing. As we announced last week, Matt was promoted to svp of spirits marketing for Pernod Ricard USA.

GAUGING THE INDUSTRY: WSD’S BI-ANNUAL SURVEY. We need your help! Please click here to answer 5 short questions about the state of the industry. We’ll post the results in the next few days. All respondents are anonymous.

Until tomorrow, Megan

“I just drank eighteen whiskies. That must be a record.”Dylan Thomas

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